I was going through the Open Tuition course notes. The transactions made me ponder on this thought. Please do comment:
When the owner puts in $ 10,000 into a separate bank account he obviously has 10000 in cash and 10000 as capital as per the Dual Concept in accounting. Now, as we make purchases or sales, the cash balances changes as per the case. But isnt this same cash the capital? Suppose the company winds up at the end of the year, the capital 10000 is owed to the owner which is repaid to him. My question is – how can u repay $ 10000 to the owner when in reality the $10 000 was actually used as cash for various purposes?
Well that’s what the owner is risking isn’t it? If the business hasn’t turned any profit in the one year it was trading, and it gets wound up, after all the trade payables etc have been paid off, the owner will only get back whatever is left over. If the business did turn a profit in that year, then the owner would get more than 10k when the business is wound up.
Do I make sense?!
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